Abstract

The Goodwill Model of the Competitive Market
Allowing for Trust and Creating Jobs

Consumers often cannot judge the quality of goods and services at the time of the purchase decision. The goodwill model explains how the market participants deal with this problem. It makes a distinction between markets for search goods, experience goods and credence goods. In markets for experience goods the goodwill mechanism can ensure completely by itself that suppliers behave with integrity. The goodwill mechanism causes irreversible costs of the market entrance in the form of goodwill investments for new suppliers. These irreversible costs of the market entrance lead to the fact that established suppliers can permanently achieve prize and volume premiums if they behave with integrity. Established suppliers, therefore, abstain from a hidden reduction of the quality of their products. The strength of the goodwill mechanism lies in the fact that it adapts itself in markets for experience goods to changed circumstances of the market by changes in the communications behavior of the market participants and thereby it stabilizes the market development and optimizes the market result. Markets for credence goods, however, are, in spite of the social institution Goodwill, characterized by market failure. The root causes for this result are selected sporadic bad quality deliveries which cannot be recognized by the consumers as those. Suitable regulations to stabilize markets for credence goods artificially generate irreversible costs of the market entrance for new suppliers. These created irreversible costs enable the established suppliers of credence goods to permanently earn positive economic profits by behaving with integrity. Numerous regulations which exist today in functioning markets for credence goods establish such irreversible costs of the market entrance. The abolition of such regulations can lead to market failure. An example having a lasting effect even today is the transformation which occurred between 1980 and 1999 of the US banking system which developed from a system of separated commercial and investment banks to a system of fully integrated banks.